Finance Exam 2

The most common arrangement for bond coupon payments is

fixed-rate interest paid in semiannual payments.

Which of the following is an example of an intangible employee benefit?

flexible work hours

Which of the following is not an example of a pure risk?

gambling losses

Easy access to credit benefits the US economy as a whole through all of the following except:

greater household debt

Michael is considering getting a closed-end lease on a car for 48 months. The car dealer quotes him a monthly payment of $349. If Michael were to buy the car with the same down payment, his monthly payment would be $465 a month. Michael's lease payment is lower because

he is not paying for the residual value of the car at the end of the lease

If you are required to pay a portion of your employee benefit costs, you have a(n)

contributory plan

Which of the following is an example of open-end credit?

credit card

If you own ________ , the issuing company must pay you any missed dividends before paying dividends to common shareholders.

cumulative preferred stock

What is the most common commission charged by discount brokers for buying/selling stocks?

$0

Gayle and Joe paid $11,000 in state and local taxes, paid $14,000 in mortgage interest, and donated $1,200 to charities last year. What would be their total deductions against their adjusted gross income (AGI)?

$10,000 + $14,000 + $1,200

If you drive 10,000 miles per year, your car gets 22 miles per gallon, and the average cost of gasoline is $4 per gallon, how much will you spend on gasoline per year?

$1818

Small-cap companies are those that have market capitalization of less than

$2 billion

Assume that your marginal tax rate is 25% and your employer allows you to contribute to a flexible savings account for health care expenses. If you would normally have in uninsured medical costs $1,000, how much will participation in the FSA save you?

$333

Mary is graduating from college in 2020 at age 22. If she wants to accumulate $1 million by the time she is age 67 and she estimates she will earn a 6% rate of return on her investments each year, how much does she need to invest each year to reach her goal?

$4,700

NorSou Railways has $400 million in debt outstanding, $60 million in preferred stock outstanding, and total common stockholders' equity of $300 million. If NorSou were to file for bankruptcy and liquidate its total assets for $600 million, NorSou would have to pay

$400 million to its debt holders, followed by $60 million to its preferred stockholders, and the remainder to its common stockholders.

Maria is applyingloan and wants to buy a house worth $350,000. What is the minimum down payment she should make to avoid having to pay for mortgage insurance?

$70,000

At large employers (>100 workers), approximately what percentage of workers participate in health insurance plans?

%64

Trudy purchased 100 shares of Tie My Shoes at $50.25 per share 1 year ago. She has just received a dividend of $2 per share, and the share is selling at a price of $52.50. How would Trudy calculate her rate of return?

($2.00 + $52.50 − $50.25) ÷ $50.25 Rate of return=Current income+End price−Beginning priceBeginning price

A large corporate conglomerate has a defined-benefit plan that promises to pay a retirement benefit equal to 3% of final salary per year of service. Charlie has worked for the conglomerate for 19 years, with a beginning salary of $100,000. He is retiring this year and his final salary $250,000. How much should Charlie expect to receive from his employer?

0.03 × 19 × $250,000

Assume you are 30 years old and in good health. Which of the following types of life insurance will be least expensive (in first year premium), assuming the same amount of coverage?

1 year renewable term life insurance

You buy shares of a mutual fund for $100 per share. One year late it is worth $110 per share and you also have received a dividend during the year of $2 per share. What is the rate of return?

12%

Bradford estimates that he will require $121,783 annually in retirement. If he expects Social Security to pay a benefit of $3,000 per month and he anticipates receiving an annual benefit of $30,446 from his pension plan, what is the retirement income shortfall in the first year of retirement?

121,783 (Before tax income needed in first year of retirement) - 36,446 (Expected income from employer DB plans)- 36,000 (Expected social security benefit not in months) = 55,337

Carla and Ben have been married for 50 years. During that time, Carla stayed home raising their children and maintaining their household, while Ben worked for an engineering firm. When they reach retirement age, Ben and Carla are eligible to receive

150 percent of Ben's Social Security benefits

Kramer Manufacturing is issuing bonds with a face value of $1,000 and a coupon rate of 5%. If the bond interest is paid semiannually, each bondholder will receive

2.5% of $1,000

A stock paying an annual dividend of $1.10 and selling at a price of $27.50 has a dividend yield of

4%

Plenius Jackson owns an engineering firm with 14 employees, and he is evaluating retirement plans for his professional staff. Which of the following retirement plans should he not be considering?

403 (b)

At large employers (>100 workers), approximately what percentage of workers participate in health insurance plans?

64%

Why would the risk-averse investor purchase a corporate bond instead of owning the stock of the issuing company?

A bond is less risky than the stock.

Which of the following is not a characteristic of 401(k) plans

Employees are required to contribute a minimum percentage of salary each year to their savings.

Christopher wants to have $10,000 accumulated in 3 years to buy a car. If his investments earn 6%, how would he calculate how much he will need to save each month to meet his goal?

Calculate the annuity for $10,000 in 36 months at 0.5% monthly periodic rate. FVA=PMT×(1+𝑖)𝑛 − 1𝑖FVA=PMT×(1+i)n - 1i$10,000=PMT×(1+0.005)36 − 10.005=$254.22$10,000=PMT×(1+0.005)36 - 10.005=$254.22

Mark is currently single and expects his adjusted gross income (AGI) to be $90,000. If he marries his girlfriend Suzie, a full-time student who has no taxable income, what will be the impact on Mark's taxable income if he files jointly as a married couple and take the standard deduction?

After marriage, with the same AGI, they will have a lower taxable income because their standard deduction will double from $12,200 (single filer) to $24,400 (married filing jointly).

Which of the following are reasons that a company might prefer to sell bonds than issue stock?

All of the above are reasons that a company might prefer issuing bonds over issuing stock.

Which of the following is/are reasons that a company might prefer to sell bonds than issue stock?

All of the above are reasons that a company might prefer issuing bonds over issuing stock.

Matthew has determined that he will need about $750,000 by the time he retires in 20 years. If he can earn 8% on his investments, how much will he need to save monthly to meet his goals?

Calculate the annuity payments required to save $750,000 in 240 months at 0.6667% monthly periodic rate. FVA=PMT x (1+i)n-1/i

Janet has $4,000 in undergraduate education expenses. Which of the following is her best choice for a tax credit based on this, if her adjusted gross income is $50,000?

American Opportunity Credit

Marilyn decides to stop buying premium coffee drinks and save the amount that she normally would have spent on them; $100 per month. If she earns 5% on her investments after taxes, how would she calculate how much she will have accumulated in 5 years from this investment strategy?

Calculate the future value of a $100 annuity over 60 months at 0.416667 monthly periodic rate. FVA=PMT×(1+𝑖)𝑛 − 1 𝑖FVA=PMT×(1+i)n - 1 iFVA=$100×(1+0.00416667)60 − 1 0.00416667=$6,800.61

Which of the following is a reason why an employer would offer employee benefits over equivalent cash compensation to employees?

Attract the most highly qualified workers

John is 30 years old and wants to retire by age 55. However, he has not yet saved much for retirement because he doesn't have any extra in his budget to apply to this goal. Which of the following is not one of the recommended strategies for obtaining the obtain the money to invest?

Borrow the money at a cheap rate of interest and invest in the stock market to profit on the difference.

Which of the following statements is correct about retirement and education funding objectives as components of a financial plan?

Both objectives require forecasting future expenses and saving over a long period of time to fund them.

Which type of bankruptcy requires liquidation of most of your assets?

Chapter 7

Which of the 5 Cs of Credit are lenders primarily assessing by examining your credit report?

Character

Which of the following statements related to alimony and child support is correct?

Child support and alimony are not included in total income on your federal taxes.

Which of the following is the federal health insurance program for the poor that also pays for nursing home care for people who qualify?

Medicaid

Who has the right to vote for members of the board of directors at the annual meeting, as well as make major policy decisions, such as a company merger?

Common stockholders

You are driving on a mountain road and hit a deer. Which insurance will cover the damage to your car?

Comprehensive

Which of the following should you choose, if you need to pay education costs for K-12, in addition to higher education costs?

Coverdell Education Savings Account and Section 529 Savings Plan

Which of the following is not correct about your consumer credit rights?

Credit card interest rates cannot be increased in the first 12 months after you open an account.

Under which type of passive investment strategy would a person receive additional shares instead of a dividend?

DRIP

Suppose that a friend who is visiting your home slips on a icy step as they are leaving your house and breaks their leg. The step was icy because you did not shovel your steps or sidewalk after it snowed. Which of the following could be used as a defense to this claim?

Either or both of these defenses could be used if the facts supported them.

Which of the following is not true of annuities?

Distributions from an after-tax purchase of an annuity is tax-free.

The number of employer-sponsored retirement plans has increased steadily since Congress passed the

ERISA in 1974

Ten years ago, Ernie invested $1,000 each in Capstone Bank and Excelsoft stock. Today, Capstone is worth $5,000 and Excelsoft is worth $12,000. When comparing the rate of return earned by the two securities, it can be said that

Excelsoft earned a higher rate of return.

If a lender approves you for a consumer loan, this means that you can afford to make the payments

False

Which of the following is true with regard to long-term care (LTC) insurance?

Future claim costs are difficult to predict, and many insurers have lost money on this product line.

Daphne has decided that she only needs $55,000 per year in today's dollars to live a comfortable life. If she plans to retire in 25 years and expects inflation to average 2.5% per year, about how much will she need to cover her expenses in the first year of retirement?

Future value of $55,000 in 25 years at 2.5% annual inflation rate

If Jakob expects to retire in 25 years and has estimated that he will need $60,000 in today's dollars, how much will he need in the first year of retirement assuming a 3% average inflation rate?

Future value of $60,000 in 25 years at 3% APY FV= PVx(1+i)n

Which insurance is purchased by an employer for the benefit of a group of employees?

Group insurance

Which type of health care plan has increased the most in popularity over the last 30 years?

High deductible health plan (HDHP

If you have begun paying back student loans, you might be able to

you might be able to deduct the interest on these loans

Which of the following is a method for improving the solvency of Social Security?

Increase the retirement age.

Which of the following is not included in gross income for federal income tax reporting?

Inheritance

You are comparing two job offers that are the same except for the retirement plan. Job 1 requires that you contribute 5 percent of your salary to the retirement plan and the employer will match 100 percent. Job 2 allows you to contribute but does not require you to do so, and if you do, the employer will match 50 percent up 5 percent of your salary. Which is better for retirement?

Job 1, because the employer contribution is higher.

Which of the following will result in higher homeowner's insurance premiums, all else equal?

Low credit score

Which of the following is not a reason why an employer would offer employee benefits?

Lower taxes

Which of the following reforms would be expected to result in the least improvement to Social Security solvency?

Making the program a defined-contribution plan, thereby allowing individuals invest in private companies will open conflicts of interest, and add business and investment risk to the solvency of the program.

Which of the following would not be considered a cause of the projected insolvency of Social Security?

Mismanagement of the Social Security Trust Fund

Jessica wants to invest her $30,000 emergency fund in securities that can provide immediate cash without being exposed to the risk of price fluctuations. How should Jessica invest her funds?

Money market funds

Which of the following stock indexes tracks performance of the largest number of stocks?

NASDAQ Composite Index

Which index is appropriate to benchmark a broad portfolio of smaller domestic companies?

NASDQ composite index

The tenants in the apartment above yours leave their bathtub water running and it overflows onto their floor and leaks through the ceiling to your unit, ruining all of your clothes and shoes. Neither you nor the upstairs tenant have renter's insurance. Which insurance will cover your personal property losses?

None of these

Up-front costs for an automobile lease include: (select all that apply)

application processing fee delivery charge capitalized cost reduction

The factor that has the most impact on your credit score is

Payment history

Which managed-care plan primarily gives you financial incentives to use "preferred" or "participating" providers who have contracted with them?

Preferred Provider organization PPO

Which of the following would give you information from a company about a new stock issue?

Prospectus

Which simple method for estimating retirement income needs assumes retirement expenses will be some fixed proportion of your preretirement needs?

Replacement Ratio

Jeb McCrown has been injured on his ranch and will not be able to return to work for a few months. Of the following sources of disability income replacement, which one should he not consider?

Retirement Savings

See-Saw Incorporated has a P/E ratio of 45, and SloMo Corporation's P/E ratio is 12. Based on these performance measures, which stock do you expect has the better growth prospects?

See-Saw

Cassandra is buying a new car and is comparing a car loan with a 48-month term at 6% interest versus a 36-month term at 5%. Which of the following statements is true about these two alternatives?

She will pay less total interest for the shorter-term loan.

Sam can't medically come back to work because of his pulmonary issues for a year. He has a short-term group disability policy that requires a 30-day waiting period and a benefit duration of 90 days. He also has a private long-term disability policy that has a 180-day waiting period and a benefit duration of two years. What will be his gaps in coverage, if at all?

Short-term coverage ends at 120 days and long-term coverage begins at 180 days.

Gertrude injured her hand snowboarding over the weekend with her friends in Aspen. Her boss at XYZ Accounting said there is no work for her that does not require the use of Gertrude's broken hand. She is estimated to be out for 90 days. Assuming she has all of these types of potential coverage, which type of disability insurance will Gertrude most likely collect?

Short-term disability

Which of the following statements is not correct?

Stocks provide a steady rate of return year after year with minimal fluctuations.

How do employees who participate in employer-sponsored benefit plans gain?

Tax advantaged spending accounts Lower premiums for comparable plans Income tax benefits

Risk pooling through insurance does not work well when risks in the pool

are correlated, such as risks from terrorism or natural disaster.

You have two job offers you are considering. One is in Denver with a salary of $50,000. The other is for $60,000 in Alexandria Virginia. If the cost of living index in Denver is 112.8 and the cost of living index in Alexandria is 142. Which job is the better deal for you based on spending power? You should solve this problem using the equation given in your notes (as practice for the exam), but can check your work using Excel Worksheet 9.2.

The Denver job offer is better because you would need to earn around $62,000 in Alexandria to have the same spending power.

What is the major advantage of direct reinvestment programs?

The avoidance of brokerage commissions

Which of the following statements regarding bond price and interest rates is true?

The longer the time to maturity, the greater the percentage decline in bond value for a given rise in interest rates.

Which type of consumer loan typically is not available with a variable interest rate?

auto loan

Which of the following is true about the effect of the Affordable Health Care Act (Obamacare)?

The number of people who are uninsured has gone down.

Which of the following is a characteristics of mortality risk that is similar to property and liability risk

The probability of loss in a given year is fairly low, so risk pooling works wel

Which of the following statements about the cost of health care is not true?

The rise in health insurance premiums has been close to the inflation rate.

For which of the following reasons should a person start investing early?

To take advantage of compound interest and the time value of money

Evan is an independent contractor who serves as a consultant to many Fortune 500 companies, making an average of $140,000 per year. As an independent contractor, he is self-employed and does not have an employer retirement plan into which he can invest. He is looking to invest into a retirement account. Which of the following would be the most appropriate for Evan?

Traditional IRA

Which of the following is not one of the recommended solutions if you are having trouble making payments on your consumer credit?

Transfer balances to another credit card.

Your expected longevity (age at death) increases as you get older.

True

Which of the following statements is correct?

U.S. government-issued securities are some of the safest securities available.

When brokers increase their commissions by engaging in excessive trading of customers' accounts, they are engaging in

churning

Aeryn Soon is a potential investor of Hippy Dippy Inc.'s preferred stock, which is currently selling for $475 per share. Hippy Dippy pays a semiannual dividend of $20, and Aeryn's required return is 8%. Should she purchase this preferred stock?

Yes, if the value based on 8% required return and $40 dividend is more than $475.

Using the financial needs method for estimating life insurance needs, which of the following would be expected to increase the total life insurance you should have.

You and your spouse have a baby.

Which of the following is correct about auto liability insurance requirements in Colorado?

You must carry a minimum of $15,000 liability insurance for damage to other people's property.

Being able to choose which benefits you want from a list provided in your employee benefit plan is considered

a cafeteria plan

When brokers profit from unnecessary trading of customers' accounts, they are said to be

churning.

Which type of investor usually requires a risk premium to be willing to invest in risky assets?

all investors

Along with ________, the rate of return on investments makes a big difference in your accumulated pretax retirement wealth.

an early investment start

In comparing job offers, you should

consider all of the factors above

Most passive investors

believe the market is inherently efficient.

Preferred stock values, like ____, generally ________ when interest rates fall. bonds; move down bonds, move up common stock; remain the same bonds; remain the same

bonds; increase in value

The bid price on a security represents the price at which a.

buyer is willing to buy a security

The contract to buy an underlying asset at a contractual price on or before the contract expiration date is a

call option

A secured loan gives the lender the right to take

certain assets or property if the loan is not repaid according to the terms in the promissory note

Which of the following is a common method used for identifying risks that you might be exposed to?

checklists

When interest rates rise, preferred stock will

decrease in value.

Your employer offers you a retirement plan that will pay you a benefit at retirement equal to 1% of your final average salary for each year that you have worked at the firm. This is an example of a

defined benefit plan

The Coverdell Education Savings Account and both types of Section 529 plans

do not tax investment earnings on plan assets or qualified withdrawals.

A stock that pays investors a regular dividend would be classified as

income

The first time that shares of stock are sold by a corporation is called a(n)

initial public offering

A 10-year government note is likely to offer a higher yield than a 2-year government note because of

interest rate risk

Transactions in the secondary market require the services of a

licensed broker.

Common stockholders have

limited liability

In most cases, the ________________the term on a consumer loan, the ________________charged

longer: higher interest rate

During the period 2008-2010, when the U.S. stock market went through a severe downturn, many people lost their jobs and/or their home values. The "Great Recession," as it was described by economists, led to an increase in risk aversion of most people due to

loss of wealth. uncertainty of future income. lack of clarity about the economic recovery. All of choices are correct.

In typical investing situations, diversification can be used to

lower losses due to company-specific risk.

Which of the following risks is not one that is faced by equity investors?

maturity risk

The two financial ratios most commonly used by mortgage lenders to assess prospective borrowers' ability to pay a mortgage loan are the

mortgage debt service ratio and debt payment ratio

The nonfinancing costs of home ownership include all of the following except:

mortgage interest

Gross capitalized cost in an automobile lease is equivalent to the ___________ for a new car.

negotiated price

If your credit card agreement gives you a grace period, no interest will accrue

on new charges for purchases until the due date, as long as you paid in full the prior statement balance.

Active investors typically try to _____________ the market, whereas passive investors attempt to __________the market.

outperform; perform as well as

Tomas has just been told by his accountant that one of his stocks that he owns produced current income during the year. This could happen if it

paid a dividend

You would only sell short if you anticipated a

price decline

Mary is planning to invest her $15,000 emergency fund in securities that can provide immediate cash without being exposed to the risk of price fluctuations. Mary should invest her emergency fund

primarily in near-term safer securities with a predominance of money market funds

Which of the following types of investors expects to earn a return consisting of some combination of regular cash flow (from interest or dividends) and capital gains (from growth in the value of the the investment over time)? (select all that apply)

real estate investor, equity investor, debt investor

A health maintenance organization (HMO) controls health-care costs by providing

relatively comprehensive health insurance, encouraging preventive medicine, and giving health-care providers financial incentives to control costs.

Wearing a face mask during the COVID pandemic is an example of which risk management method?

risk reduction

Over time, ___________ investments provide you with _____________ rates of return on average.

riskier; higher

A home equity loan is often referred to as

second mortgage

Stock purchases made on the New York Stock Exchange (NYSE) are

secondary market trades.

In a truly efficient market,

securities would always be correctly priced.

Risk retention is the risk management method most appropriate for

small, predictable and budgetable losses.

Which of the following types of life insurance does not have a cash value?

term life insurance

The minimum payment required on your credit card is

the amount of interest and fees due on the account for the period plus 1 percent of the outstanding balance.

When an investor asks a broker to place a market order, the investor is offering to buy the stock at

the current market price at the time the traded is executed.

The risks of owning real estate investments include

the lack of liquidity. demand for rentals. All of the choices are correct. relatively high transaction costs.

Variable-rate loans usually carry lower initial interest rates than fixed-rate loans because

the lender has the option of raising the rate later

You have just been told by your accountant that one of your investments had a capital gain over the year. This would mean that

the value of the investment appreciated.

The extreme difficulty in predicting the market is the main disadvantage of ________ strategies.

timing

It is illegal for corporate insiders to

trade on company information not available to the public.

Actively managed portfolios, such as those run by professional investment managers, tend to

underperform the market as a whole.

If your employer offers you the option to buy contributory dental expense insurance

you should compare the annual costs to your expected expenses to see if the premium cost is worth it.

You receive a job offer that includes $5,000 reimbursement for education expenses per year. You have no plans to go back to school. In comparing job offers, you should

you should focus only on the differences between two choices